03.01.10

Haircuts for job hunters?

I can think of no stronger an argument to the average person for sweeping United States tax simplification and reform than this video (a variation of which I saw while watching the Sugar Bowl on New Year’s Day — a game which, to be honest, was almost sickeningly boring after the first half):


Is a haircut a job-hunting expense?

Do you know the answer to the question the video poses under the current tax system? Answering the question is left as an exercise for the reader; it’d take me more effort to find out the answer than I’m willing to make. Good luck reading IRS documentation to figure out the answer! (Food for thought: which segments of society are most likely to know or learn about, and take advantage of, this deduction, particularly given that it requires itemizing deductions, among other restrictions? What classes of society benefit most and least?)

It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood.

James Madison, The Federalist No. 62

Instead, consider the answer under the far simpler Hall-Rabushka flat tax, occupying a single postcard-sized form (plus one for your company if you’re self-employed): the question is meaningless. Whether you get the haircut for personal pleasure or for job-search reputability, it wouldn’t affect your income tax in the slightest. More generally, an individual’s income taxes under the flat tax don’t depend at all on how he spends his money. (See Section 202, referencing Section 201 and Section 101; the law’s text, also linked from the above page, fits in seven nearly pocket-sized pages, so it’s easy to navigate it and only slightly less easy to understand its requirements. Analysis and understanding of its rationales is more difficult but is well within the grasp of an intelligent taxpayer with a numerical bent.)

In the meantime, Congress, please keep preserving the existing tax system and even making it more convoluted, complex, and distortionary — taxpayers love you for it!

16 Comments »

  1. Fair tax is a better idea than flat tax (although anything is better than what we have)

    People shouldn’t be punished for earning money.

    Taxing consumption also allows you to tax everyone, even people that don’t file their taxes.

    Comment by Michae Kaply — 03.01.10 @ 17:45

  2. The fair tax is a straight consumption tax. As the referenced book explains, the flat tax is, from an economic standpoint, identical to a consumption tax. Therefore, the fair tax and the flat tax are economically identical. I think I prefer the flat tax because collection costs are lower — rather than paying once per transaction, you pay once per individual and once per company — but I admit my understanding of the fair tax is not what it should be to say that with absolute confidence.

    People that don’t file taxes should, in my humble opinion, be prosecuted for doing so. If the cost is filling out a form once a year based on data you can easily track with minimal effort, I have no sympathy for anyone who fails to do so. Even under the current system you’re still breaking the law; you can choose to do that, but you have to accept the consequences.

    Comment by Jeff — 03.01.10 @ 17:54

  3. You are wrong that flat and fair tax systems are equal economically. One taxes the receiving of money for labor and another taxes the usage of money for everything else. Personally, I think the consumption tax would be more equal, since everybody would be affected by it. Still, I think the best course of action is to repeal the IRS, along with the FED and many other government intrusions.

    Comment by Havvy — 03.01.10 @ 18:15

  4. Maybe if you got a haircut more often, you’d feel differently about it. Get a job, you dirty hippie!

    Comment by Justin Dolske — 03.01.10 @ 19:28

  5. I think you’re mistaken in your knowledge of the flat tax. The Hall-Rabushka flat tax consists of two separate components: an individual flat income tax, and a business flat income tax. I’m guessing, based on the wording of your comment, you only know of the former component. The latter component is the same flat percentage, but it applies to income minus salaries and employment benefits minus equipment/land purchases minus raw components purchases. Of these three exemptions, the first is taxed at the individual level; not exempting it would be double-taxing it, which would provide an incentive for businesses to spend revenue in the other two manners as a tax avoidance strategy. (You would probably see more investment in automation and materials-usage efficiency, artificially reducing job availability, in the unhappy world where this mutated flat tax were in effect.) The first (via the individual tax) exemption constitutes investment in labor. The second and third exemptions constitute business investment in capital. Recall that the inputs to a business are capital and labor, so we’ve covered all of the business’s investments. Since what’s produced by a business (the remainder after exemptions are removed) is eventually consumed by consumers, at worst through the business’s liquidation if it falls apart, the flat tax is effectively a tax on consumption. Thus, taken together, the two components complement each other to be equivalent to a single tax upon consumption. (NB: a person who is self-employed would have to file a business income tax to account for his business’s consumption, as I alluded in the original post.)

    I recommend that you read chapter 3 of the referenced book so as to gain a better understanding of the mechanics of the flat tax, because I think you don’t understand it as well as you think you do.

    Comment by Jeff — 03.01.10 @ 19:40

  6. Dolske, you haven’t seen me since I got a haircut on December 15. :-P I’m back to respectable-looking now, or something like that (beard’s still there, not planning on dropping it, not worth the maintenance costs).

    Comment by Jeff — 03.01.10 @ 19:42

  7. Incidentally, if anyone is wondering why, given my explanation of the flat tax’s equivalence to a consumption tax, there are even two components — it’s because that split enables the introduction of individual progressivity. Having individuals be responsible for directly paying part of the tax means that you can exempt individual income up to a certain level (varying based on the size of your household including dependents), then tax excess income at the flat tax percentage. Also, it’s a good democratic mechanism to ensure that taxpayers feel a direct effect from changes in the flat tax rate; if businesses paid it all the effects on taxpayers, while the same economically, would be secondhand and much more difficult for the average person without economics training to correctly comprehend.

    Comment by Jeff — 03.01.10 @ 20:14

  8. This is bait-and-switch.

    What makes the tax code complicated are deductions and credits. You can have
    a progressive tax with or without deductions and a flat tax with or without deductions. “Flat” has little to do with it. A half-page table of tax rates
    is hardly mind-boggling complexity.

    A flat tax is inherently unfair because of a simple fact known to every
    economist: The utility of money is not a linear function of the amount of
    money you have. Utility would be what you would look at to determine fairness.
    Discussions of “flat” taxes that do not address this are totally missing the point.

    Comment by Lance — 03.01.10 @ 20:57

  9. Why should we look to utility? The purpose of general-purpose taxes is twofold: to pay for services such as enforcement of the rule of law, and to penalize removal of value from the economy. What does utility have to do with either of these goals?

    How would we measure utility to properly tax it? We have no way to accurately measure individual utility functions across all variables. We can measure utility with respect to single variables, with some inaccuracy, using diff-in-diff techniques, with considerable time delay, but we can’t extrapolate that to all possible variables. However, we can precisely measure income and expenditures. They’re reasonable proxies if you think utility is even worth considering for purposes of taxation, so why shouldn’t we use them?

    Finally, accurately taxing utility in some unspecified manner leads to absurdities. Suppose I visit family over Christmas. Each day we sit down to eat a dinner of a fixed set of ingredients in a fixed prepared form. In one situation, we sit and eat without interacting in any manner. In another, we sit and eat while interacting, talking, and generally enjoying each other’s company, while consuming the same ingredients as in the first situation, in the same prepared form. Suppose in the latter situation we derive utility from this interaction, more than we do in the first situation with no interactions. Do you suggest the extra utility in the latter situation deserves to be taxed somehow? The external world is completely indifferent to the two situations; why does society have any claim whatsoever on some fraction of that extra utility? It’s no skin off their noses. In contrast, a consumption tax penalizes you for taking value out of the economy, which by definition has an effect on the world external to a particular individual’s situation and choices. It is a penalty on taking away things the rest of society might have enjoyed. Utility is an entirely personal concept; it is not a zero-sum game, so an increase in utility for one individual does not necessarily result in equivalent decreases elsewhere. What reason is there to penalize gains in it?

    Comment by Jeff — 03.01.10 @ 21:53

  10. Two extremes for income tax:
    (1) Charge everyone a set amount (e.g. $5,000 per person)
    (2) Charge 100% tax for income above a certain level (e.g. Any personal income above $60,000 goes to the government)

    Obviously rich people would prefer the first, poor people would prefer the second. In the full spectrum “Flat” tax leans towards the first. Current system leans toward the second.

    If you were earning less than $10,000 would you prefer that the first ten thousand wasn’t taxed or would you prefer that you paid the same percentage as a millionaire?

    Comment by dan — 05.01.10 @ 17:07

  11. The first extreme, taken less so where you pay for what you get, is somewhat plausible, if you think of taxes as demonstrating the concept of payment for services rendered. However, it’s also not realistic. How do you accurately measure the value of rule of law to a person? Certainly, say, Bill Gates of Microsoft took much greater advantage of the rule of law than I currently do. But exactly how much is difficult to say, particularly after you start to consider indirect effects, feedback, and simultaneity. Thus, measuring it by looking to consumption — the measure of how much he appreciates value from the world at large — as the flat tax does is a reasonable method. That said, I’m not sure why you think this extreme (I question your choice of axis, incidentally) resembles the flat tax in any way. The flat tax, as tax based on consumption, is directly antithetical to a fixed fee, I would think.

    The latter extreme would be disastrous, because it completely removes any monetary incentive for individuals to work once they achieve that certain level of income (or even before, depending on their inherent thriftiness). The evaporation of economic progress as the greatest of incentives to innovate is removed — particularly because it would affect the most successful — would be breathtaking. There are certainly other incentives to work past that threshold, and I’m sure many would still continue to work, but a very large number would not.

    Try as I might, I can’t bring myself to empathize with your closing question. If I benefit from rule of law, it should be my duty to pay for it, no matter how little or much I earn or consume. Equal protection of the law must mean something: that if I make a dollar, I be treated the same way as any other person earning a dollar, regardless whether that dollar be my first or my last; that if I spend a dollar on something, I be treated the same way as any other person spending a dollar on the same thing, regardless whether that dollar spent be my first on something or my last.

    Comment by Jeff — 05.01.10 @ 21:52

  12. What makes the tax code complicated are deductions and credits. You can have
    a progressive tax with or without deductions and a flat tax with or without deductions. “Flat” has little to do with it. A half-page table of tax rates
    is hardly mind-boggling complexity.

    Agreed. But I don’t think the utility part matters. The progressivity of your taxation system is a social choice, not a logical one. I think we need a simple income progressive tax with fewer deductions. Deductions erode the tax base in unpredictable ways and are needlessly complex. Most of the mare stupid. I understand the idea of trying to shape behavior but I don’t think this is the best way to do it. If you are interested in shaping behavior then do it on the consumption side where it’s uniformly applied and is passed with greater consensus than obscure deduction law changes (such as a carbon tax, etc.).

    I tend to disagree with most of the people who say higher taxation is an disincentive for people working. It’s not that it isn’t to some degree but it’s overestimated. 100% clearly is a disincentive. But, 60% top bracket for those making over $5 million is not fully unreasonable to me. It’s not because I hate the rich, but it’s because when you’re in a bracket that big you’re earnings tend to increase exponentially. It’s very different to be taxed 60% on $5 million of your $10 million salary than it is to be taxed 60% on your $1,000 raise from your $31,000 salary. I doubt many people say “no, I’m only getting $2 million out of my $5 million, I’m not going to work”. And, if they do we have to decide how bad of thing that would be.

    Comment by Fritz — 06.01.10 @ 13:34

  13. It’s worth keeping in mind that as your salary rises, your consumption often tends to rise commensurately. This NY Times article elaborates a little on how someone might somewhat reasonably spend “hugeous” amounts of money without seemingly going all-out doing so. Those extra dollars that I think shouldn’t be taken from you just because you’re successful are often “needed”, and their taking does affect your behavior. And, yes, I scoff at the people who could spend that much money that easily — but as I see it, the point of an exemption is to not completely destroy your life if you don’t make much money. Extra gradations beyond the single exemption don’t help with that, and they’re a good way to foster even more class envy (once you start taxing higher income at higher rates, why not bump it up further, and divide even more? particularly since you are many, and “they” are few). It is reasonable to say this: it may be permitted (but is not actually a strict requirement) that you can earn enough to make a frugal living without being taxed. Beyond that (possibly even before that, given that some who could earn a comfortable living intentionally don’t to get charity from others), it’s unnecessary comforts and luxury, and I don’t think anyone has a greater or lesser claim on those than anyone else.

    Comment by Jeff — 06.01.10 @ 15:30

  14. Since you had a question about my axis, basically x is income, y is tax. See http://imgur.com/c7oF1.png

    I wasn’t endorsing option 2 (above) merely pointing out that the “flat” tax is on a continuum of options. I wasn’t saying that the “flat” was the same as a set fee, just “leaning” towards that end of the spectrum.

    I was also pointing out that you ignore the fact that the burden of paying a flat taxes is higher for those in poverty than for those above poverty. To make the point clear I would rather that a person in poverty spend their money on feeding their family than on paying taxes. For a wealthier person the choice might be between a nice car and taxes.

    Comment by dan — 07.01.10 @ 16:51

  15. “Axis” may have been a poor choice of wording on my part, as of course you can graph out the effects of tax policy with respect to income. Perhaps stated more clearly, I don’t understand how the two ideas define a continuum.

    As for burden being larger on poor than on rich, well…you’re poor. You should expect life to be harder. And, there’s always an alternative to being poor. (More or less, that is. We can imagine extremes of, say, mentally handicapped quadriplegics, where this wouldn’t be the case, but: as in law, hard cases make bad policy. Treat such exceptions more specifically, not through the vague and diffuse mechanism of tax policy, but rather perhaps through precisely targeted direct subsidies. Although, in general, I’m not convinced private charity is incapable of being up to the task of responding in such cases.)

    One other thought on your graph: it’s mathematically accurate, but it’s practically misleading, in a first-impression sense. A cursory glance at your graph might give the impression that progressivity or income caps generate more tax revenue than a flat tax (or set fee). A horizontal axis determined by probability density on incomes would show how much extra revenue tax hikes will actually generate (although even that’s not quite accurate as static scoring ignores responses to such policies, but that’s a much subtler concern), rather than showing some free-floating large number untethered from reality. I know the graph wasn’t intended to mislead, but it still rubs me just a little bit the wrong way because, at an unthinking level, it subtly suggests that higher taxes on higher incomes mean big new revenue.

    Comment by Jeff — 09.01.10 @ 02:06

  16. The graph intended to show the amount of tax an individual would pay based on their income. You are correct that it does not indicate the total amount the government would get with each system or attempt to portray the distribution of incomes.

    My goal was only a rough sketch to show the concept rather than exact numbers (as a result it may be “untethered to reality” in some respects). However I made a conceptual mistake of showing the progressive tax as stair-stepped. In reality it is more of a linear approximation to a curved line.

    http://i.imgur.com/VpzRt.png

    With regards to the continuum think of it this way: one end of the spectrum puts the burden of paying taxes unfairly on the poor (set fee), the other unfairly on the wealthy (100% tax). A “progressive” tax and “flat” tax are compromises between these two extremes. A flat tax has a heavier burden on the poor than the progressive or 100% tax but a lighter burden than a set-fee tax. On the other side, the flat tax has a lighter burden on the rich than the progressive tax or 100% tax but not as light as a set-fee.

    Comment by dan — 11.01.10 @ 05:46

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